I’m Done with RRSPs
For years, a big personal financial focus for me and my family has been making annual RRSP contributions, but no more! I’m done with RRSPs. Or at least I’m done with contributing to them now that I’m retired.
It’s a strange feeling to contemplate starting to withdraw from RRSPs/RRIFs. Long-time successful savers often have a hard time turning off the saving habit, and I’m no different. My spreadsheets that contain multiple layers of conservative assumptions tell me how much I should be spending each month, but I rarely get there.
RRSPs are a great personal finance tool to reduce income taxes over a lifetime. But, barring unforeseen new sources of income, I expect that the RRSP room created by my 2017 income will go unused. Instead, I expect to make annual withdrawals starting at the end of 2018 to use up my lightly-taxed income room.
I’m interested in hearing from others about how it felt to transition from being savers to spenders.
It’s a strange feeling to contemplate starting to withdraw from RRSPs/RRIFs. Long-time successful savers often have a hard time turning off the saving habit, and I’m no different. My spreadsheets that contain multiple layers of conservative assumptions tell me how much I should be spending each month, but I rarely get there.
RRSPs are a great personal finance tool to reduce income taxes over a lifetime. But, barring unforeseen new sources of income, I expect that the RRSP room created by my 2017 income will go unused. Instead, I expect to make annual withdrawals starting at the end of 2018 to use up my lightly-taxed income room.
I’m interested in hearing from others about how it felt to transition from being savers to spenders.
Congratulations on your achievement!
ReplyDelete@Anonymous: Thanks!
DeleteI'm 58 mostly retired with a part-time small business. I contributed $1507 to my RRSP last week which I expect to my last contribution. I plan to start drawing my RSSP down next year but mostly living off dividend income from my acounts.
ReplyDelete@Marko: For anyone with a 9-5 job doing what someone else tells them to do, leaving that job feels like retirement, even if they then work at some side gig being they're own boss. So, by that definition, it sounds like you're retired. If you're like me, it will feel a little strange to start drawing from RRSPs.
DeleteCongrats on your retirement! Yes, it is decidedly strange to think about conserving what you have and also drawing income from it, and how to best balance the two. The financial services industry is slow to catch on to the need for advice in this area. I stopped working involuntarily 3 years ago, and now consider myself retired at age 66. We self-financed the first 18 months from cash reserves, and started drawing Social Security 18 months ago. So far, we haven’t drawn much at all from our accounts, because of the cash we had and inherited cash. But there are no more paychecks, inheritances, or business earnings. We’re speaking with our adviser Friday to map out a plan, and I’m grateful for the hand-holding!
ReplyDelete@Deborah: Thanks. Hopefully, you'll get some good advice from your adviser. It's too late now, but it might have been a good idea to take stock 3 years ago. It may turn out that you've been overspending for the last 3 years (underspending is possible, too). Hopefully, you won't have to cut back. Good luck.
Delete[Speaking about my dad].
ReplyDeleteIt feels very strange, putting money into the RRSPs every year, then suddenly the very next year, withdrawing.
Also a change for the due date, as it's no longer deposit by March 1, but withdraw by December 31.
@aB: In recent years, I've mostly made RRSP contributions early, so I've got a more than year-long gap from my last contribution to my first withdrawal. But you're right that the new December deadline is a change.
DeleteWe first sought fee-only advice about 8 years ago, and have had a US-Canadian CFP for 4 years. We take stock regularly, with him and on our own. The "plan" is for how to spend going forward, as we have been decidedly "underspending." Thanks for your concern.
ReplyDelete@Deborah: There are a great many overspenders in the world, but there are quite a few of us underspenders around as well. If I can't bring myself to spend as much as I can safely, I plan to give money away to family and possibly others while I'm still alive.
DeleteAssuming you are young and will be retired for a long time, and concerns about giving up the tax free compounding when you withdraw from your RRSP? I know when I quit working my taxes will be much lower which is in favor of withdrawing from my RRSP. But I have plenty of savings outside my RRSP that I could live on, it might be better to draw non RRSP savings down first, which would ultimately lower my income further, then tap into even bigger RRSPs with years of expected tax free returns. Of course, CPP and OAS would kick in at some point, maybe my income would get bigger as I got older. Lots of variables to consider, assumptions to make, hard to analyze. Have you looked at this?
ReplyDelete@Greg: Yes, I've looked at this, and I agree that it's hard to analyze. I believe I've got the right answer to minimize lifetime taxes in my case. It involves living party on non-registered assets and party on RRSP withdrawals for the next several years. But, if I were younger, I'd probably be better off just spending non-registered money for a while.
DeleteHi Mike,
DeleteCongratulations on your retirement. A question for you, isn't it better to use the RRSP first instead of using non-registered in early years. My thinking is that the lesser we (forcibly) withdraw from RRIF the better to minimize OAS clawbacks.
The answer to your question depends on a number of factors. Basically it comes down to whether doing RRSP withdrawals early has a sufficiently lower tax rate than withdrawing later to compensate for the lost free compounding within the RRSP. For my case, modest size early RRSP withdrawals make sense. Your mileage may vary.
DeleteHi...I'm transitioning as well and switching from saving to redeeming has been a real learning experience. I'm transferring my pension plans to ETFs and efunds. I'm asking lots of questions which inevitably has led me to more questions. I no longer ask how much I need to retire. Now I'm asking why does the rule of 4% make sense (and for that matter the min and max of LIFs) because looking at returns over 10 years and more I will be making at least 5%. But it's all good and reading your blog (and others) has been very helpful... Happy retirement
ReplyDelete@Bmbersez: That sounds like a lot of changes at once. If you're not working, at least you have some time to deal with it all. Be careful about basing your retirement plans on the returns of the last 5 years. We've been in a powerful bull market for some time. Good luck.
DeleteHi Michael,
ReplyDeleteCongrats on joining me, I finally started my CPP at age 70 with the thought that I would draw down my RRSP's till then.
Watch out what you wish for, even though I drew down RRSP's they kept going up, then a friend of mine asked me to do some work for him at a charity.
I have never been so well of and I an sure you will enjoy your retirement in the same way.
Thank you for your comments along the way
@Anonymous: Sounds like you did the right things to minimize taxes, but money keeps piling up. It's a happy problem to have.
DeleteStill contributing and have maxed every year since late 20's. Wife and I now have $1.15m combined at ages 47/46. Will split this years $30k between mine and spousal since wife retired 2 years ago. Probably 4 more years of contributions but maybe a more after retirement at 51-52 since I will be getting a multi-year buyout of my equity in my business. Will likely have $2m combined and start drawing it down immediately, maybe $40k/year each to supplement non-reg account dividends.
ReplyDelete@Chris: It sounds like you're set. It will be interesting to see if you find it strange to be drawing from RRSPs when the time comes.
DeleteWhat are your 'rules of thumb' when someone retires early? For example for a 1 million portfolio with assets equally divided between registered and non registered assets and you retire at 45, would it still be wise to slowly draw down the RRSP especially when there are many years of compounding left.
ReplyDelete@Anonymous: I don't claim to have all the answers, but for the simulations I've done, 45 was too young to start drawing on RRSPs unless the money drawn is completely untaxed. For any income that gets taxed at the next lowest rate (20.05% in Ontario), it didn't make sense to draw any until somewhere between 55 and 60. Your mileage may vary.
Delete" how it felt to transition from being savers to spenders." It felt good! Worked hard all those years and reaping the benefits :). Retired two years ago. Should have earlier. Work is stress (no matter the job), and I didn't realize it until I quit. Now so much more emotionally and physically healthier! But, what was hard was finding a new normal. Took me two years. Almost went back to work! Glad, so glad now that I didn't.
ReplyDelete@Anonymous: It sounds like you had to work through a few things after retiring. I'm glad you found your way to a good place.
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